“Digital banking”, as a term, kicked off seriously around four years ago when financial institutions embarked on a journey to transform their operations and implement digital initiatives focused on front-office channels, mobile apps, and other similar customer touchpoints.
In most cases, quick wins were embraced to demonstrate some form of innovation capabilities, but they’ve only scratched the surface. Becoming ‘digital’ needs to go further than whizzy front-ends towards better harnessing and analysing customer behaviour data to develop pro-active sales and marketing recommendations on a deeper level.
Some digital initiatives seem to be driven by the desire to be viewed externally as an innovator – to showcase capabilities by exploring new technologies such as Artificial Intelligence (AI) and Machine Learning (ML) to impress customers – without being interweaved with internal processes and systems.
Now that we’re farther into the digital transformation journey, banks are starting to find that they are trapped due to a lack of true digitalisation and data silos within the organisation’s internal operations.
We are at an inflection point where financial institutions are operating in a market environment where technologies such as data analytics, AI/ML, and robotics are reaching technological maturity and greater mainstream adoption, and even non-traditional industry players are entering the market to grab a piece of the pie. Furthermore, banks are operating within an increasingly regulated sector where cost pressures are making it more challenging to meet evolving customer demands.
No longer a point of difference, the harnessing of ‘digital’ strategies on many fronts is now widely considered a hygiene factor. There are a host of reasons why:
- To accelerate transformation and change or adapt business models
- To minimise costs and maximise operations efficiencies
- To make profitable business decisions; to mitigate against fraud and errors, and to optimise the allocation of resources (both financially and staff-wise)
However, many institutions on the digital transformation journey are starting to arrive at roadblocks having neglected to focus on introducing innovation into their internal functions and processes.
As a bank expands its digital footprint, its risk profile is bound to broaden. In addition, digitalisation can create more points of potential vulnerability and the increased threat of new cyber attacks. In my experience, many firms focus on fulfilling regulatory changes and cost-cutting objectives – but when risk management is not included in the digital transformation journey, the level of vulnerability is increased exponentially. This is worse when functions are working in silos and are not interconnected.
The good news is that we are starting to see financial institutions progressively expand their focus beyond the front-office by involving risk and regulation functions in the customer journey upfront. However, this path is a long one.
The advanced customer journey should encounter around 10 internal touchpoints which are invisible to the customer, including the risk, regulatory, treasury and finance functions. When it’s all implemented effectively, processes such as the application and approval of a mortgage would be completed in two days instead of weeks, thanks to the seamless connection of the respective functions across the bank.
However, there’s still some way to go towards fulfilling this vision – which includes the evolving role of the traditional CRO (chief risk officer) and that of the risk function. CROs of the future will move away from reactive regulatory compliance to proactive risk management. Risk will now involve agile systems architecture that can handle both present and future regulatory requirements while bringing business benefits in terms of flexibility to adjust to a changing competitive landscape.
With digitalisation becoming a mainstay concept, it’s time for banks and financial institutions to rethink and take a holistic view on their respective transformational journeys. It’s now imperative to work with fintechs and external partners in the ecosystem to collaborate and innovate. However, it’s becoming clear that financial institutions need to take a good look at their internal goings-on, and not just worry about how they look in the mirror.
Arnaud Picut is Global Head of Risk Practice at Finastra.